Monday, September 30, 2013

FORMER Xstrata chief executive Mick Davis reinforced his comeback into the mining sector yesterday, with the announcement that his new mining venture has raised $1bn (£618m).

Private equity firm TPG and commodities trading house Noble have invested $500m each in X2 Resources, which aims “to create a new mid-tier diversified mining and metals group by…identifying and acquiring assets and businesses at an opportune time in the cycle”.

Noble will be X2’s preferred marketer and provider of supply chain management and logistics services.

South African-born Davis left Xstrata with a £15m payout at the time of its mega-merger with commodities trader Glencore in May.
An array of his ex-Xstrata colleagues form the executive team at X2, including former finance chief Trevor Reid and Andrew Latham, previously head of group business development....MORE

Fruits of ingenuity:
Agricultural machinery maker Shibuya Seiki and the National Agriculture and Food Research Organization demonstrate a robot that can pick ripe
strawberries at the annual Auto-ID and Communication Expo at the Tokyo
Big Sight convention center Wednesday. | AFP-JIJIA robot that picks ripe strawberries while farmers sleep has been unveiled with claims it could cut workloads by two-thirds.

The device, unveiled Wednesday, can pick a piece of fruit every eight
seconds by using three cameras to determine which strawberries are
ready to pick. A mechanized arm then darts out to snip each one free and
place it into its basket.

The 2-meter robot moves on rails between rows of strawberries, which in Japan are usually grown in elevated greenhouse planters.

It “calculates the degree of ripeness from the color of the
strawberry, which it observes with two digital cameras,” said Mitsutaka
Kurita, an official at Shibuya Seiki, the developer of the machine....MORE

HT: Mish's Global economic Trend Analysis*For years machine vision was neither fish nor fowl. From iProgrammer:...There has always been a basic split in machine vision work. The
engineering approach tries to solve the problem by treating it as a
signal detection
task using standard engineering techniques. The more "soft" approach
has been to try to build systems that are more like the way humans do
things. Recently it has been this human approach that seems to have been
on top, with DNNs managing to learn to recognize important features in
sample videos.
This is very impressive and very important, but as is often the case
the engineering approach also has a trick or two up its sleeve....

I’m delighted to be spending this week committing overt acts in
furtherance of the Volokh Conspiracy. Since joining Stanford in 2011,
I’ve been studying the increasing automation, connectivity, and
capability that promise to dramatically change our lives, institutions,
and laws. My posts this week will focus on one key example: self-driving
vehicles (or whatever you want to call them).
The timing is fortuitous, since any remaining legal or technical issues
that we fail to collectively solve in the comments section of this blog
can be remedied at next week’s U.S. House hearing on “How Autonomous Vehicles Will Shape the Future of Surface Transportation.”

A number of other government bodies are already shaping the legal future of autonomous driving. Nevada,
Florida, California, and the District of Columbia have enacted laws
expressly regulating these vehicles, California’s Department of Motor
Vehicles is currently developing more detailed rules, and a number of other states have considered bills. The U.S. National Highway Traffic Safety Administration (NHTSA) released a preliminary policy statement earlier this year, and Germany, Japan, the United Kingdom,
and the European Union have also taken initial domestic steps.
Meanwhile, parties to the 1949 Geneva and 1968 Vienna Conventions on
Road Traffic are discussing how to reconcile language in these treaties with advanced driver assistance systems....MUCH MORE

Bryant Walker Smith is a fellow at the Center for Internet and Society
at Stanford Law School, a fellow at the Center for Automotive Research
at Stanford (CARS), and a lecturer in law at Stanford Law School who
writes, speaks, and teaches on the legal and policy aspects of
increasing automation. He is a member of the New York Bar and a former
transportation engineer who has worked on infrastructure issues in the
United States and throughout Europe. Bryant also chairs the Emerging
Technology Law Committee of the Transportation Research Board of the
National Academies and the planning task force for SAE International's
On-Road Automated Vehicle Standards Committee...

I heard this story from a Credit Suisse seminar held by Michael
Mauboussin. He is excellent investment thinker who ahs written a numbe
rof provocatiev books on decison-making. Make time for Mike.

The great behavioral psychologist and Noble Prize Winner in Economics
stated that of all the papers that he wrote the one that was his
favorite was On the Psychology of Prediction written in 1973. In this work, Kahnaman with his co-author Amos Tversky
discuss the difference between intuition and statistical prediction.
They discuss the problem of representative bias and how there are three
types of information for any prediction. There is the base case or
outside view, there is the specifics about the particular case or inside
view and finally the relative weights you assign to each....MORE

Here's an ungated version of the paper via the University of Washington (15 page PDF)

William Buiter was a member of the Bank of England's Monetary Policy
Committee, 1997-2000. He is currently Professor of European Political
Economy at the London School of Economics. He tells scary stories as
well as Stephen King. From the Financial Times:Those whom the gods would destroy, they first make mad...

...A
sixty percent retracement of today's (and tomorrow's?) decline is well
within the bounds of possibility (I won't go all Fibonacci on you)....

60%
of 777.68 is 466.62 points. We closed up 485.21, an overshoot of 18
points. I'll lay it all off to luck. Here's our "Quote of the Day"...

The quote was Washington Mutual up 141% to 8.2 cents.

That's a wrap for our nostalgic look back at September 2008 and I think this is a good place to stop with the serial "Today in the Financial Crisis" posts.
We'll have more, October 2008 in particular was pretty amazing from the perspective of an equities participant but it won't be every day.

The market was only down 5.78% for the month although it had felt like a lot more and looking at the DJIA, the 666 point decline would have seemed a bit ominous had anyone noticed.
The Ramones' 'I Wanna be Sedated' had been the theme song for the month but by the 30th everyone was just worn out and feeling old.
We started playing this version of the song:

The low over the past 24 hours has been $101.16 and if I were a betting
man I'd wager that we fill or at least enter the gap before resuming the
downtrend and going through that big fat round number, $101.37 last....

Will you be taking a flutter on the Man Booker? Or the Mercury music
prize? Bookmakers are reporting a rise in 'highbrow' betting, especially
online

Worth a punt? You can
get odds of 9-2 on David Bowie winning this

year's Mercury music prize.
Photograph: Larry Busacca/WireImage

This week, Ladbrokes
bookmakers announced an increase in what has been called "highbrow" or
"cultural" betting. The firm's Alex Donohue says: "This kind of betting
has been around for a while, but it's burgeoning, and stakes are
rising." He gave me some examples: betting on the Man Booker prize with
Ladbrokes is up from £4,000 in 2005 to £15,000 so far this year. Betting
on the Nobel prize for literature is up from just over £1,000 in 2005
to approaching £20,000. I asked about the Nobel peace prize, because,
having long considered Chelsea (formerly Bradley) Manning a shoo-in,
I now think Putin's in with a shout, after his impressive showing over
Syria, but Donohue says: "We don't do the Peace prize. I think we
probably should." I told him I heartily agreed. After all, if the
2.15 at Haydock Park justifies running a book, then so does the quest
for world peace....MORE

How exactly can author Haruki Murakami be the odds-on favorite to win
the Nobel Prize in Literature if his book is only available in Japanese?
For the most accurate Nobel oddsmaker Ladbrokes, reading the books is
irrelevant — and the bookies openly made the prediction without any
intentions to do so.

Given the Swedish Nobel Committee's intense secrecy, discussion of the
future winner is active and open for debate among prognosticators. But
they should just look to Ladbrokes, which has correctly predicted the
Nobel Prize winner with 50 percent accuracy over the past eight years, according to the Boston Globe, making it far more accurate than most pundits or literary critics.

The secret to their success? Psychology. Most reporters writing on the coming Nobel decision are what one popular betting site's spokesman calls
"lazy journalists," and they like to cite the bookies' odds — such as
3/1 favorite Haruki Murakami (right) — in their early stories on
potential winners (guilty as charged). But
by setting the early terms of the debate, Ladbrokes and other
oddsmakers create a bandwagon-type effect where the bettors' favorite
becomes the actual favorite. And this effect then builds its way up to
the pundits and, potentially, to the Committee itself....MORE

Berkshire may receive about 13.2 million shares in New
York-based Goldman Sachs, according to an agreement that uses
the average closing price on the 10 trading days through today
to calculate Buffett’s stake. The number of shares is an
estimate based on the nine trading days through Sept. 27 and may
change based on fluctuations in the stock price today. The bank
closed at $159.85 last week.

Goldman Sachs turned to Omaha, Nebraska-based Berkshire in
2008 to bolster capital and shore up market confidence when
shares plunged following the collapse of Lehman Brothers
Holdings Inc. Buffett, Berkshire’s chairman and chief executive
officer, invested $5 billion for a preferred holding and got
warrants to buy $5 billion of stock for $115 a share. ...MORE

Long time CI readers know that we've been stalking Warren for a while (I didn't understand BKHT at $800, he said shame-facedly).
This
$5 bil. deal has some very intriguing ramifications for both financiers
and policymakers. It also contains insight for investors that I want to
think through.
In the meantime, use of the 'Search Blog' box for Buffett or Berkshire is good fun. Possibly rewarding too.
Or try 'Munger', not nearly as many results but not bad. The first hit is:

Corn is lower since this piece was published, $4.4425 last.
From Agrimoney:

Corn
futures tumbled to a three-year low, while soybeans slumped back below
$13 a bushel, after the US revealed that its inventories of both crops
were far bigger than had been thought.

Corn futures for December dropped 1.7% to $4.46 ½ a bushel, the lowest for a spot contract since September 2010.

Soybeans for November delivery plunged 2.4% to $12.88 ¼ a bushel, their lower in more than a month.

The
falls followed the release by the US Department of Agriculture of its
latest quarterly stocks report, a series which has gained a reputation
for causing large price moves.

Extra supplies

The
report estimated corn stocks as of September 1, the close of 2012-13, at
823.6m bushels, a number far higher than the 661m-bushel figure that
the USDA had been working with, and to which investors foresaw only a
small upgrade.

The USDA highlighted lower use of the
grain than last year over the June-to-August period, flagging that
"disappearance is 1.94bn bushels, compared with 2.16bn bushels in the
same period last year".

Stocks
estimates are viewed as particularly price sensitive in commodity
markets, with larger supplies seen limiting the need for buyers to pay
up....MORE

As with the Summary for Policymakers, just a bookmark for now.
This is the final draft, the actual report will be released sometime in 2014. For those who think it's funny that the Summary for Policymakers (see below) is published before the completed report is released, that's just the way the IPCC rolls.
From the Intergovernmental Panel on Climate Change:

They also beat Cramer, but that's a different post.
From the Cass Business School, City U., London, April 4, 2013:

Researchers at Cass Business School have found that equity indices
constructed randomly by 'monkeys' would have produced higher
risk-adjusted returns than an equivalent market capitalisation-weighted
index over the last 40 years.

A study based on monthly US share data from 1968 to 2011 found nearly
all 10 million indices weighted by chance delivered vastly superior
returns to the market cap approach - a discovery likely to come as a
blow to investors that have billions of dollars worldwide invested on a
market cap-weighted basis.

The finding comes from two papers* published by Cass Business
School's Cass Consulting, and sponsored by Aon Hewitt, which
investigated alternative methods of constructing equity indices.

Co-author Professor Andrew Clare, explained: "We programmed a
computer to randomly pick and weight each of the 1,000 stocks in the
sample; we effectively simulated the stock-picking abilities of a
monkey. The process was repeated 10 million times over each of the 43
years of the study.

"The results of this experiment showed that many of the monkey fund
managers would have generated a superior performance than was produced
by some of the alternative indexing techniques. However, perhaps most
shockingly we found that nearly every one of the 10 million monkey fund
managers beat the performance of the market cap-weighted index."...MORE

...Out of the alternative indices, the Sales-weighted index performed
the best, beating 99 per cent of the monkeys' randomly constructed
indices.

I made a serious career track mistake.
Years ago a counselor pointed
out that I seemed to have an affinity for animals (It's true. Kids and
dogs like me. So do drunks and folks suffering from various
psychopathologies).
Had I followed up on her thinking I would now be tenured, trading outside my species and living the grant-proposal dream....

...chimpanzees in nature do not store property and thus would have little opportunity to trade commodities...

(for one week only, the monkey is ahead on performance: see below)
"...You know what – I don’t work for Murdoch”

Cramer;
Aug. 20 show. Then he said let Cramer be Cramer or something, I wasn't
paying attention, I was reading Warren Buffett's story about arbitraging
cocoa beans against an equity.

Turns out Cramer was responding to the Barron's story
"Shorting Cramer" which had this line:

When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test.
They complained that the list from YourMoneyWatch.com contained some
stocks from the program's "Lightning Round," in which Cramer gives a
quick analysis and a buy or sell decision on stocks phoned in live by
viewers. These, they argued, shouldn't count in our tally.

Add these personality quirks to the qualities that mark you as a social dinosaur:

You're not comfortable renting out a room in your house or
turning over the keys to your car for hours or days at a time to total
strangers. When you travel you prefer to stay at a hotel with a
predictable level of guest service rather than racking out on someone's
couch.

When you rent a car, you prefer that you're dealing with a company
that has a corporate reputation to protect, rather than a person who may
or may not have had the brakes checked sometime in the last decade.
What Paul likes most about the PUC regulations is that they don't try
to shoehorn ride-sharing services into a format of traditional
transportation businesses like taxis, but focus instead on making sure
that the new companies meet reasonable safety standards.

Ride-sharing services such as Sidecar and Lyft enable passengers
seeking a ride to plug in their needs to a mobile phone app. They're
matched with drivers who are planning or willing to go their way. Driver
and passenger meet and work out a price. At the end of the trip the
rider pays the ride-share service, which takes out its fee and passes
the balance on to the driver....MORE

Just kidding about the psychologically important bit. Oil is going down because there is a lot of it around.
Here's today's action, note the gap just after 5 a.m. Sept. 28:

The low over the past 24 hours has been $101.16 and if I were a betting man I'd wager that we fill or at least enter the gap before resuming the downtrend and going through that big fat round number, $101.37 last.

Sunday, September 29, 2013

Recent work on forecasting oil prices raises the question of whether oil
industry analysts know something about forecasting the price of oil
that academic economists have missed. This column presents evidence that
they do, but economists know how to improve further on these
practitioners’ insights.

Petroleum products
such as gasoline and heating oil are produced by refining crude oil.
Many oil market analysts believe that the prices for these petroleum
products contain useful information about the future evolution of the
price of crude oil. In particular, changes in the product price spread –
defined as the extent to which today’s price of gasoline or heating oil
deviates from today’s price of crude oil – is widely viewed as a
predictor of changes in the price of crude oil. For example, in April
2013 Goldman Sachs cut its oil price forecast citing significant
downward pressure on product price spreads, which it interpreted as an
indication of reduced final demand for products. Likewise, in 2011
energy consultant Kent Moors predicted higher oil prices based on
widening gasoline and heating oil-price spreads.

Although energy
economists have made great strides in recent years in forecasting the
price of oil at short horizons, the forecasting ability of product
spreads has never been formally analysed to date. Our recent work asks
whether academic economists have missed something about forecasting oil
prices that oil industry analysts know. The answer is that they have,
but so have practitioners. Based on a rigorous real-time out-of-sample
evaluation of numerous oil price forecasting models, we find that not
all product spread forecasting models are useful in practice. Some
forecasting models used by oil market analysts lack a solid foundation,
but there are alternative product price spread models that greatly
improve our ability to forecast the real price of oil. We develop
forecasting models based on the gasoline-price spread that are
systematically more accurate in real time compared with conventional
no-change forecasts.

Such models work particularly well at forecast
horizons between one and two years, far beyond the short horizons for
which earlier oil-price forecasting models based on economic
fundamentals have been shown to work well. We obtain even more accurate
results with a model that allows the predictive power of gasoline price
spreads and heating oil spreads to evolve over time.

Predicting with spreads

Our study is based
on the proposition that that the price of crude oil can be expressed as a
weighted average of product prices. This proposition has a long
tradition in energy economics. For example, oil analyst Philip K.
Verleger popularized the idea that the demand for crude oil ultimately
derives from the demand for refined products, with refiners buying crude
oil only if they can generate a profit at prevailing product prices.
Our forecast analysis does not depend on this economic interpretation;
all that is required to motivate the forecasting models in question is
that the price of oil and the product prices share a common trend.

The study considers
four basic forecasting models based on spreads with futures prices as
well as spot prices for gasoline and heating oil:

Models of individual product spreads such as the gasoline-price spread or the heating oil price spread.

The evaluation
period extends from early 1992 until September 2012. The study evaluates
the out-of-sample accuracy of each of the forecasting models in terms
of the recursive mean-squared prediction error (MSPE) relative to the
no-change forecast and based on their ability to predict the direction
of change in the real price of oil.

We find that not all product spread models are useful for out-of-sample
forecasting, but some models perform well. The best single-spread
forecasting model is a model based on the gasoline spot spread alone
which yields MSPE reductions as large as 15% and directional accuracy as
high as 63% at the two-year horizon. Heating oil spot spreads are far
less accurate predictors than gasoline spot spreads. Weighted product
spread models are never more accurate than gasoline spread models.
Perhaps surprisingly, there is no evidence of forecasting models based
on the commonly cited 3:2:1 crack spread having out-of-sample
forecasting ability....MUCH MORE

The government brokered a deal for Citigroup to take over Wachovia that was doomed to fail.
The House of Representatives did not pass the Administration's bail out bill.
The Dow Jones Industrial Average closed at 10,365.45, down 777.

WASHINGTON
— The historic effort to rescue the U.S. financial system was thrown
into doubt Monday after the House rejected a $700-billion emergency
plan, causing the most devastating stock market collapse in 21 years and
the deepest one-day point dive ever by the Dow.

Stunned leaders
of both parties and the White House scrambled to put together a new
remedy after the legislation that was widely expected to pass the House
fell victim to partisan acrimony....MORE

...Prices of oil and other commodities, already down early Monday on
fresh concern about the global economy, accelerated their slides after
the House vote. Crude futures tumbled $10.52, or 9.8%, to $96.37.

The
day began with global stock markets falling on the new signs of
financial stress in Europe and fears that the rescue package wouldn't
quickly ease a logjam in the credit markets or stave off a deep economic
downturn....

..MARAUDING polar bears could cause terror on Iceland after experts claimed global warming could bring the killer beasts across the sea....

...Climate expert Thor Jakobsson said: "Since two have reached the shore, more could be on the way."Thor is calling for aerial surveillance of the ice, as well, to protect the Icelandic population:
“Since
two bears have already reached the shore, more could be on the way, but
there’s no telling whether this trend will continue in the coming
years....

Today's 777 point loss on the DJIA is the largest point loss ever. I
don't think it is in the top ten largest percentage losses, I haven't
looked. However, as Tech Trader Daily points out, the Nasdaq's losses
definitely are. A sixty percent retracement of today's (and tomorrow's?)
decline is well within the bounds of possibility (I won't go all
Fibonacci on you). Then lower....

This is just foreign/domestic ownership. There has never been a national land census but there are ways to get more granular. If I get around to it, it might be worth a post.

From Modern Farmer:Who Owns U.S. Agricultural Land?

The USDA released a report today detailing
foreign holdings of U.S. agricultural land as of December 2011, and
it’s pretty fascinating stuff. “Foreign persons” are defined as
individuals who are not citizens of the U.S., foreign businesses and
governments that have their principal place of business in a foreign
country and U.S. entities in which there is a significant foreign
interest.

Below are some of the more eye-opening facts:

So, How Much Land is Foreign Held?

Foreign investors held an interest in 25.7 million acres of U.S. agricultural land (forest land and farmland) as of December 31, 2011. This is an increase of 1,490,781 acres from the December 31, 2010 report, and represents 2.0 percent of all privately held agricultural land in the United States.
Forest land accounted for 54 percent of all foreign held agricultural acreage, cropland for 19 percent, and pasture and other agricultural land for 27 percent.

Foreign persons have reported acreage holdings in all 50 States and Puerto Rico.

The state of Texas has the largest amount of foreign held U.S. agricultural land with 2,894,563 acres. This figure represents only 1.9 percent of privately owned agricultural land in Texas.

Maine has the second largest amount of foreign held agricultural acres with 2,877,965 and Washington
has the third largest amount of foreign held agricultural land with
1,671,102 acres, which is 7.6 percent of its privately held agricultural
land.

16 percent of Maine’s of Maine’s privately held agricultural land is held by foreign investors; this is approximately 11 percent of the reported foreign held agricultural land in the United States.

Hawaii has the second largest percentage of foreign
held U.S. agricultural land, 158,887 acres, which is 8.8 percent of the
privately held agricultural land in the state. Washington, Alabama and Florida follow.
Kansas, Washington and Wisconsin showed the biggest increases in foreign-held agricultural acres in 2011.

The increases were primarily due to the execution of long-term leasehold interests by wind energy companies.

Who Owns It?

Canadian investors own the most reported foreign held agricultural and non-agricultural land, with 28 percent, or 7,250,834 acres. Foreign persons from the Netherlands own 19 percent, Germany owns 7, the United Kingdom owns 6 and Portugal
owns 5. Together, 9,511,437 acres or 36 percent of foreign-held acres
are owned by individuals or entities from these countries....MORE

The writer is more sanguine than I but still a nice catch by Economonitor:

Inflation Indicator Goes Negative, but Don’t Panic, Deflation is NOT on the Way

There was an interesting nugget of data buried deep in yesterday’s GDP report from the Bureau of Economic Analysis: The rate of change of the deflator for personal consumption expenditures fell to an annual rate of -0.1 percent from the 0.0 percent rate reported earlier. An even broader measure of inflation, the GDP deflator, was also revised downward, although it remained positive. The PCE deflator, rather than the more widely publicized Consumer Price Index, is the Fed’s preferred indicator of price trends.

The downturn in the PCE deflator prompted University of Michigan professor Justin Wolfers to ask, in a blog post on Bloomberg.com, Where is the Panic over Deflation? To be fair, Wolfers was quick to say that he himself was not panicking at a one-quarter downturn in a single inflation indicator. Still, it is a good question. Is this the time to begin worrying about deflation, or is it not?

It is not. Before reading too much into the downtick in the PCE deflator for the second quarter, we should check some forward-looking inflation indicators. One of the best is the inflation expectations measure published by the Cleveland Fed. It draws on price trends for Treasury Inflation Protected Securities (TIPS), bonds that carry inflation protection linked to the CPI. The spread between the TIPS price and the price of ordinary Treasury bonds of similar maturity indicates how much investors are willing to pay for inflation protection. The Cleveland Fed decomposes that spread into a measure of inflation expectations and a risk premium. As the next chart shows, after reaching record lows earlier this year, both the Cleveland Fed’s 5-year and 10-year expected inflation rates have moved up. Clearly, the upturn points to a reduced probability of deflation....MORE

One thing to keep an eye on is the spread between seasoned and newly issued TIPS, it went positive during and after the Lehman blowup as deflation fears took hold. I am not convinced that TIPS are that good a forecaster of deflation.

I've been asked why we continue to run pieces by Mr. Edwards, especially in light of our disparagement of fellow bear David Rosenberg.
The flippant answer is Albert amuses, Rosenberg doesn't.

More seriously, 1) Edwards made three calls in 2008 that were quite amazing, links below. 2) He has been more correct on interest rates (sub 2% 10-year) than anyone which is helpful because if you can get interest rates right you can pretty much figure out everything else.
(he is currently looking for sub 1%!)

I still don't understand this from a year ago but may have to just suck it up and move on.
Via ZeroHedge:

When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The "99%"

The premise in Albert Edwards' latest letter "Is the Fed blowing bubbles to cover up growing inequality... again" is simple: the unprecedented social inequality in the US (and the rest of the world - as pointed out here), and what it will ultimately lead to. Regarding what it will lead to, Edwards believes, is that "growing inequality drains the swimming pool dry. The crunch, when it comes, will be ugly." Simple enough.
Digging a little deeper.
It is ironic that nearly five years ago, we first posited that the
only result QE would achieve as a result of reflating asset prices to
astronomical levels, while transferring (in)finite wealth from the
middle class to the 0.1%, would be an inevitable tear in the social
fabric resulting, eventually, in outright conflict and/or war (and,
ultimately, hyperinflation because the Fed will stop at nothing to reflate the debt, especially in a rising rate environment - even paradropping money from helicopters, something even Deutsche Bank agrees with now).
Back then everyone called this (as so often happens) a naive
conspiracy theory. Now, even respected strategists are starting to see
things our way. From Edwards:

Some argue that central banks had no choice in the face of under-consumption, while conspiracy theorists might even conclude there has been some sort of unspoken collusion among policymakers to
"rob" the middle classes of their rightful share of income growth by
throwing them illusionary spending power based on asset price inflation.
We will never know. But now it all makes more sense!

Naturally, economists being the last to voice concerns about the
status quo (and their sanctity of their tenures of course), are even
more muted. But even they are starting to admit the underlying threat.

Set aside any moral or political concerns you may have
about rising income inequality - worries about poverty, justice, undue
political influence or even social mobility. According to Mr. Dervis,
co-author of the book, the research collected in “Inequality in
America,” shows that a growing number of economists suspect that once
inequality passes a certain point it may jeopardize economic stability
and economic growth. As the book argues, "rebalancing of the
distribution of income may play a role in unlocking the U.S. economy's
growth potential in a sustainable way."

That is exactly the point Warren Buffet, Bill Gross and Stanley
Druckenmiller make. You don’t have to be a communist to conclude that
high levels of inequality not only adversely affects long-term growth,
but also increases the economy’s vulnerability to recession.

Edwards then goes on to observe if in a world of record income
inequality, all that matters is one's "starting point", i.e., being
born with a silver spoon in the mouth. His conclusion: why certainly....MORE

On September 7, 2008 Fannie Mae and Freddie Mac were placed into conservatorship.
On September 14, 2008 Merrill Lynch agreed to be acquired by Bank of America.
On September 15 Lehman filed their bankruptcy petition.
On September 16 AIG became a 79.9% subsidiary of the U.S. Treasury.

Within 10 more days the Nation's largest thrift, WaMu was seized and five days later Wachovia gobbled up.

One
of these days I'll get around to telling the story of National City
Bank and their early adventures in securitizing sub-prime loans back in
the 1920's.
National City is now Citigroup.
What was old is new again.

Google has a new search algorithm, the system it uses to sort through
all the information it has when you

search and come back with answers.
It’s called “Hummingbird” and below, what we know about it so far.

What’s a “search algorithm?”
That’s a technical term for what you can think of as a recipe that
Google uses to sort through the billions of web pages and other
information it has, in order to return what it believes are the best
answers.

What’s “Hummingbird?”
It’s the name of the new search algorithm that Google is using, one that Google says should return better results....

...What type of “new” search activity does Hummingbird help?
“Conversational search” is one of the biggest examples Google gave. People, when speaking searches, may find it more useful to have a conversation.

“What’s the closest place to buy the iPhone 5s to my home?” A
traditional search engine might focus on finding matches for words —
finding a page that says “buy” and “iPhone 5s,” for example.

Hummingbird should better focus on the meaning behind the words. It
may better understand the actual location of your home, if you’ve shared
that with Google. It might understand that “place” means you want a
brick-and-mortar store. It might get that “iPhone 5s” is a particular
type of electronic device carried by certain stores. Knowing all these
meanings may help Google go beyond just finding pages with matching
words.

In particular, Google said that Hummingbird is paying more attention
to each word in a query, ensuring that the whole query — the whole
sentence or conversation or meaning — is taken into account, rather than
particular words. The goal is that pages matching the meaning do
better, rather than pages matching just a few words....MUCH MORE

Friday, September 27, 2013

Special Report:
Through the second half of 2011, debate raged in financial markets
over whether the U.S. Federal Reserve would embark on a third round of
massive bond purchases, known as "quantitative easing," to shore up an
anemic economy. Pacific Investment Management Co wasn't waiting to find out.

The giant fund-management firm,
led by co-founder Bill Gross, started buying tens of billions of
dollars in mortgage-backed securities guaranteed by federally sponsored
agencies like Fannie Mae and Freddie Mac.
In the third quarter of 2011 alone, Pimco's flagship Total Return Fund,
the world's largest mutual fund, doubled its holdings of these
securities to $80 billion, according to a Reuters review of trading and
other data.

While Pimco was
building its hoard, the Fed, in a surprise move long before any word on
quantitative easing, said it would start buying more of the same kind of
debt, known in the trade as "agency MBS." The U.S. central bank would
acquire as much as $30 billion of the securities a month by reinvesting
proceeds from its earlier purchases. Prices rose.

As
2011 slid into 2012, Pimco started enjoying big gains on its agency
holdings. Even better, the Fed in September 2012 finally announced a
third round of quantitative easing, nicknamed QE3. To keep supporting
the U.S. housing market, it would buy even more agency MBS. Pimco's Total Return Fund posted billions more dollars in gains.

Pimco's winning bet unfolded like this:

*
In December 2008, the Fed hired Pimco, along with three other big Wall
Street firms, to implement enormous purchases of agency MBS to keep
interest rates low and spur the U.S. economy. *
Over the next few years, Pimco repeatedly invested heavily in those
same securities - far more than other big investors, even considering
its size.

* Pimco's mortgage plays
in 2009 and 2012 - when Fed buying was heavy - handed the firm and
investors in the Total Return Fund a gain of $10 billion, excluding net
investment flows, according to Reuters estimates.

There
is no evidence of illegality or impropriety in Pimco's actions. Pimco
says that it kept its employees who were helping the Fed at arm's length
from those investing for its funds, and that its bond-buying bet was
conceived before the Fed's program was begun. The Fed says it
implemented and enforced strict controls over the trading done by the
firms....MUCH MORE

The Dow (^DJI)
has gained more than 3% this month, 10-year Treasury yields have fallen
since the Fed’s “no taper” news after briefly hitting (gasp) 3% and gold hasn’t been doing much of late.

But Jim Grant, founder and editor of Grant’s Interest Rate Observer,
reminds The Daily Ticker that unlike 2010, when the memory of 2008 was
fresh in investors’ minds and we had a “bull market in fear,” we are now
in a “bear market in fear.”

He says experts can read this in the depths of the options markets,
where people are no longer buying derivatives to protect themselves
agains 'tail risks, but are "getting in the swim of things going up."

So this moment may be a fairly
good one in which to begin fretting (though he advises against being a
permanent worry wart), according to Mr. Grant.....MORE

Wondering where all the gas for yesterday's big storage injection came from?
From the Energy Information Administration:

...Consumption declined during the report week.
According to data from Bentek Energy LLC, total consumption fell 5.6%,
driven by a steep decrease in consumption for power generation in every
region of the country. With weather moderating, air conditioning loads
have dropped off. Consumption of gas for power generation in the
Southeast, Texas, and the Northeast, the three largest consumers of
natural gas in this sector, decreased by 12.1%, 25.7%, and 12.5%,
respectively. Industrial and residential/commercial demand both
increased, rising by 1.0% and 2.7%, respectively. Pipeline exports to
Mexico rose by 16.6% over the report week, but accounted for a
relatively small component of natural gas disposition.

Supply declined during the report week, but less steeply than consumption.
Bentek reported that total supply fell 1.3%, driven by a production
decline of 1.2%. Northwest and Midwest reductions in gas imports from
Canada led to a decline in total gas imports from Canada of 4.4%.
Canadian flows to the U.S. Northeast were flat at near zero. Imports of
LNG were up for the report week, with shipments arriving in the Sabine
Pass Terminal in the Gulf Coast on Tuesday and Wednesday, but totals
remained close to historical lows....MORE

Location: New York, N.Y.Price: $46,000,000The Skinny: This 40-foot-wide Neoclassic French
townhouse on Manhattan's Upper East Side possesses a level of grace,
charm, and sophistication that only a residence custom-built for a woman
who redesigned the White House Rose Garden for her friend Jacqueline
Kennedy could achieve. Bunny Mellon (famed
horticulturist, member of the International Best Dressed List,
granddaughter of the inventor of Listerine) and her husband Paul (heir
to the Mellon banking fortune, one of five national designated
"Exemplars of Racing") had the 11,000-square-foot, 14-room mansion built
in 1965, to—and this is something of an understatement—exacting
standards. The house, which features three exposures, and a garden with a
reflecting pool, last sold in 2006 for $22.5M and now finds itself back
on the market for $46M,
because sure, why not. Thankfully, not much seems to have changed,
save, perhaps, an updated kitchen, since the Mellons' heyday....MORE

Not derivative art, that's a whole different concept.
Some folks buy books by the pound, kilo whatev, no reason not to value art by the square-foot or cubit ² or...
From the Social Science Research Network:

Abstract:

This paper introduces a new financial metric for the
art market. The metric, which we call Artistic Power Value (APV), is
based on the price per unit of area (dollars per square centimeter) and
is applicable to two-dimensional art objects such as paintings. In
addition to its intuitive appeal and ease of computation, this metric
has several advantages from the investor’s viewpoint. For example, it
makes it easy to: (i) estimate price ranges for different artists; (ii)
perform comparisons among them; (iii) follow the evolution of the
artists’ creativity cycle overtime; and (iiii) compare, for a single
artist, paintings with different subjects or different geometric
properties. Additionally, the APV facilitates the process of estimating
total returns. Finally, due to its transparency, the APV can be used
to design derivatives-like instruments that can appeal to both,
investors and speculators. Several examples validate this metric and
demonstrate its usefulness.

We collect prognostications but this is one I missed. The writer is US Markets Editor for the Financial Times in New York.
From Michael Mackenzie at the Financial Times, January 9, 2010:

...No matter how bulled up the equity market becomes, should data
improve, the Fed is likely to remain very cautious, mindful that it
needs to keep the bond market happy.

Becoming the buyer of last resort in the past year resulted in the Fed crossing an important line in the bond market.

The exit from QE is always going to be messy, unlike the relatively
simple act of raising the overnight target interest rate. It leaves
policymakers hoping that talk of extending QE will help contain rates
from rising too quickly and save them the trouble of actually buying
more bonds.
The danger, however, is that the bond market seeks a resumption of
buying. A lot of easy money was made on Wall Street bond desks last year
thanks to the Fed's buying. Can you blame dealers for not wanting to
see that party end?

This potentially leaves the Fed trapped, for any sign of a recovery
in the economy will be accompanied by rising rates, which in turn
threaten sustainable growth and could well shake the equity market.

To prevent such a scenario, it is very likely that the Fed will reinforce its role as the buyer of last resort.

All which entails that the eventual end of QE will be a messier
affair than perhaps many investors care to think. And one that bodes ill
for the dollar and US fiscal policy down the road.

Investors face losses from fixed-income securities “for the next couple of years,” according to
BlackRock Inc. (BLK), the world’s biggest money manager.

“Overall returns of the market will continue to be
negative as monetary policy shifts,” Scott Thiel, deputy chief
investment officer for fundamental fixed income, said at a media
briefing in London today....MORE

The oil complex is heading for a mixed performance for the week with WTI
lower for the third week in a row while Brent and HO are around
unchanged with the spot RBOB contract still showing a gain for the week.
The week has been driven by a cautiously changing sentiment on the
geopolitical front offset a bit by the ongoing and massive quantitative
easing program in the US.

Yesterday the UN Security Council
permanent members passed a resolution requiring Syria to surrender their
chemical weapons. If Syrian does not comply a new resolution will have
to be passed imposing enforcement which Russia currently opposes. For
the moment Syria will continue to move to the background insofar as
acting as an upside price driver for the oil complex.

The much
talked about high level meeting between the west (P5+1) and Iran also
took place yesterday in NYC. As a sign of possible progress yesterday's
meeting was the highest level meeting with Iran and the West since prior
to the 1979 Islamic revolution. Reportedly it was a constructive
meeting with some saying a window of opportunity has opened for a
peaceful resolution to the Iran's nuclear situation. Whether or not this
is the beginning of a quick resolution is still a big question mark.
For now about 1.1 million bpd of Iranian oil remains shut-in but the
negative rhetoric from both side seems to have stopped.

On the
economic front mixed data out of the US yesterday as initial jobless
claims dropped by 5,000 to the lowest level since 2007 but the updated
Q2 GDP came in unchanged at 2.5 percent versus many in the market
expecting an upward revision. The economic data out of the US yesterday
as well as over the last week or so still supports the US Federal
Reserve continuing with their massive QE program for now.

The
November Brent/WTI spread has remained in a widening pattern and within
the $4.50/bbl to $6.70/bbl trading range. The spread has mostly
discounted the conciliatory comments from Iran and comments that a new
deal resolving the nuclear stand-off will come about soon. All signs
still suggest that it will take time for any deal to be negotiated. In
addition if a deal is negotiated it is still going to take Iran some
time to restore its crude oil production & exports to the level that
was in play prior to the sanctions.

As such the Brent/WTI spread
is still trading with a geopolitical risk premium even as Cushing crude
oil stocks continue in a steady destocking pattern. With Cushing stocks
continuing to decline and with additional takeaway capacity coming on
stream over the next 3 to 6 months the likelihood of another huge
surplus in Cushing is a low probability event....MORE

From Petroleum Economist:
Replay of 1986 price collapse looms
03 June 2013
Chatham House warns that the price of oil is
heading for a crash similar to the one in the mid-1980s, when world oil
prices fell by over 50%, writes Damon Evans

Crude is up $1.74 at $106.77.
Our medium term mental map is a fake-out shake-out, i.e. higher to suck in some buying and then a 10-15% drop, back under $100.
There is a lot of oil sloshing around and Asia isn't going to be needing it for a while....